How Do New Regulations Impact Clean Electricity Tax Credits in 2025?

January 17, 2025

The introduction of the Final Regulations by the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) on January 7, 2025, marks a significant shift in the landscape of tech-neutral clean electricity production tax credits (Tech-Neutral PTC) and clean electricity investment tax credits (Tech-Neutral ITC) under Sections 45Y and 48E of the Internal Revenue Code. These new regulations aim to establish clear and comprehensive rules for determining greenhouse gas (GHG) emissions rates, eligibility for Tech-Neutral Credits, and several other stipulations related to clean electricity production and investments. The intention behind these updates is to ensure that the incentives for clean electricity investments are both fair and effective, driving a more eco-friendly energy sector forward.

Clarification on Aggregation and Bonus Credits

A notable highlight of the Final Regulations is the emphasized stance on disallowing the aggregation of energy projects for Tech-Neutral Credits, barring the One-Megawatt Exception. This means that each qualified facility and energy storage technology (EST) must individually qualify for any bonus credit amounts. Essentially, facilities cannot be grouped together to meet the criteria for bonus credits, ensuring a more stringent and detailed assessment process. By focusing on the qualification of each facility on its own merits, these regulations foster a meticulous enforcement of clean energy standards.

The regulations also mandate that each qualified facility or EST undergo separate evaluation for tech-neutral ITC qualification, disallowing co-located or hybrid systems from receiving a combined credit as one taxable unit under Section 48E. This focus on individual qualification ensures accurate adherence to clean energy goals and closes potential loopholes that might arise from aggregating multiple projects. The goal is to maintain high standards by evaluating and incentivizing each facility based on its individual contribution to clean energy, thus promoting more effective and genuine investments in the sector.

Prevailing Wage and Apprenticeship Requirements

The Final Regulations bring much-needed clarity regarding the application of prevailing wage and apprenticeship (PWA) requirements, especially in connection with the One-Megawatt Exception. These updated rules not only incorporate the PWA requirements from the June 2024 regulations but also introduce additional aggregation principles relevant to this exception. These adjustments are designed to ensure that workers engaged in clean electricity projects are paid fair wages and have access to apprenticeship opportunities, aligning with broader fair labor practices.

By embedding these requirements into the regulations, the focus extends beyond merely promoting clean energy. It also emphasizes the importance of justice and equity within the labor market. Ensuring fair compensation and creating pathways for skill development through apprenticeships encourages quality workmanship and fosters a capable and motivated workforce within the clean energy sector. This dual emphasis on environmental sustainability and labor equity advances the overall objectives of the regulations.

Role of Software in Qualified Power Conditioning Equipment

A significant decision within the Final Regulations is the exclusion of software from being considered an integral part of qualified power conditioning equipment. Such software, due to its intangible nature, does not meet the criteria set for these tangible systems. This exclusion maintains a clear boundary between tangible and intangible assets, thus ensuring only physical components are eligible for Tech-Neutral Credits.

This distinction not only simplifies the qualification process but also narrows the focus to tangible assets that directly contribute to clean electricity production. By clearly delineating the eligibility criteria, the regulations help minimize ambiguity and promote consistent application of the rules. This reduction in potential confusion ensures that regulatory compliance is easier to achieve and sustain.

Rules for Retrofit and Incremental Production

The Final Regulations offer precise guidelines on the application of the 80/20 Rule and the Incremental Production Rule for retrofitting existing facilities and expanding their capacity. For retrofit facilities, the rule is clear: a retrofitted facility must maintain the value of used components under 20% of the entire project to be considered “new.” This critical stipulation ensures that the bulk of the facility’s components must be new, thus contributing significantly to clean energy production.

In terms of capacity expansion, the rules allow additional capacity or new units at an existing facility to qualify based on incremental production, known as the Incremental Production Rule. Notably, pre-2025 facilities focused solely on expansion are not required to adhere to the 80/20 Rule. These clear frameworks for retrofitting and expanding facilities help maintain high standards for qualifying as clean energy producers. Moreover, they provide clear-cut guidelines, making it easier for energy producers to plan upgrades and expansions that meet the stringent criteria for Tech-Neutral Credits.

Definitions and Considerations for Combustion or Gasification (C&G) Facilities

The Final Regulations also delve into detailed lifecycle analysis (LCA) requirements for Combustion or Gasification (C&G) Facilities. These requirements include well-defined boundaries spanning from feedstock generation to electricity transmittal, ensuring a comprehensive assessment of the facility’s environmental impact. This thorough approach is essential for maintaining the integrity and effectiveness of the regulations.

Moreover, the regulations mandate that emissions over a 30-year time horizon must be considered, providing a long-term perspective on the facility’s GHG emissions. This extended outlook ensures that the environmental impacts are accurately assessed over the entirety of a facility’s functional lifespan. These granular definitions and criteria for C&G facilities support the regulatory aim of enhancing sustainable and environmentally friendly practices within this sector.

Qualification of Natural Gas Alternatives

Addressing the complexities involved in qualifying natural gas alternatives, the regulations offer detailed guidance. Processes involving methane, like biogas, coal mine methane, and fugitive methane, are subject to comprehensive lifecycle analysis (LCA) covering all associated emissions. This holistic approach ensures that the environmental impacts of these alternative fuels are fully accounted for, providing a clearer and more accurate assessment of their contribution to clean energy production.

By acknowledging and addressing these complexities, the regulations promote the inclusion of natural gas alternatives that meet high environmental standards. This move not only supports the diversification of the energy mix but also underscores the commitment to reducing overall GHG emissions. The aim is to encourage the use of cleaner energy sources without undermining the robustness of environmental assessments.

Thermal and Hydrogen Energy Storage

The Final Regulations also bring clarity and adjustments to the definition and eligibility of thermal and hydrogen energy storage properties for the Tech-Neutral ITC. For thermal energy storage, eligible equipment must meet the goal of altering time profiles for subsequent heating or cooling use. This criterion ensures that such storage systems contribute to energy efficiency and facilitate better management of energy demands.

For hydrogen storage, the Final Regulations have removed the previous end-use restrictions, easing the eligibility criteria for such systems. This adjustment simplifies the qualification process for hydrogen storage, encouraging broader adoption and innovation within this field. These changes reflect a responsive and forward-looking approach to regulating the evolving landscape of energy storage technologies. By refining the criteria for these systems, the regulations help pave the way for more advanced and effective energy storage solutions that align with clean energy goals.

Subscribe to our weekly news digest.

Join now and become a part of our fast-growing community.

Invalid Email Address
Thanks for Subscribing!
We'll be sending you our best soon!
Something went wrong, please try again later